The most common business contract types explained

Finance and legal

6 March 2020

From partnerships and promissory notes to leases and letters of intent, the legal world of business contracts can seem overwhelming for small business owners. But don’t worry, it’s not as scary as you might think.

Most small businesses actually use the same types of contracts and agreements throughout the year. Here, AXA looks at some of the most common business contracts you’ll probably come across if you run a small business in the UK, and when you might use them.

 

1) Bill of Sale

What is a Bill of Sale?

A Bill of Sale is a legal document that transfers ownership from one person to another. It’s evidence that both parties have agreed on the terms of ‘transfer’. The transfer of goods can mean selling, exchanging, or giving them as gifts. For most small businesses, the Bill of Sale document will be used for the selling of goods and can be used as a receipt

When would I use a Bill of Sale?

A Bill of Sale can be used by anyone to transfer the possession of goods to a new owner. It’s commonly used by car dealerships for the sale and purchase of second-hand cars.

 

2) Indemnity agreement

What is an indemnity agreement?

An indemnity agreement is a contract stating that a business is not responsible for any loss or damage. It also makes sure that appropriate compensation is available if any such loss or damage occurs. Indemnification is commonly referred to as ‘to hold harmless’, but they’re also called ‘no fault agreements’ or a ‘waiver of liability’.

The ‘indemnitee’ is the person who is being protected from any fault or liability, while the ‘indemnifier’ is the person who promises to reimburse the indemnitee for any claims.

When would I use an indemnity agreement?

Lots of business owners use indemnity agreements to protect their company and their customers. For example, a dog walker might ask owners to sign an indemnity contract to prevent them taking legal action if their pet was hurt by another dog. Or, a rental car company might ask drivers to sign an indemnity agreement before driving off in their car.

 

3) The Joint Contracts Tribunal (JCT)

What is the Joint Contracts Tribunal (JCT)?

JCT produce a range of documents and contracts for the construction industry. The documents range from standard agreements like collateral warranties and contractor tenders, to more complex construction contracts like the Standard Building Contract, which is designed for large projects when detailed provisions are needed.

 

4) Leases

What is a lease?

Think of a lease as a long-term rental agreement – you borrow something over a period of time for an agreed cost and return it when the contract ends. The lessee (the borrower) and the lessor (the provider of goods) both face consequences if they fail to uphold the agreed contract terms.

When would I use a lease?

The most common business leases are for properties and vehicles. A lease for an office or retail space is one of the most notable contracts for businesses, given that it’s usually a costly investment. Businesses often lease their vehicles rather than buying because the initial outlay is lower, and they don’t need to worry about the vehicles deprecating in value.

Long-term leasing in England and Wales – What is a leasehold?

A leasehold is when a property is leased over an extended period, with most agreements between 90 and 100 years. There is a contract between the leaseholder and the freeholder (landlord) to set out the rights and responsibilities of both parties.

 

5) Letter of intent

What is a letter of intent?

A letter of intent outlines the most important terms of an agreement. They give people the opportunity to outline the major points of an agreement before deciding on definitive terms. Letters of intent are usually non-binding contracts and are seen as a ‘handshake’ deal before signing the final contract.

Why would I need a letter of intent?

If you wanted to buy a property, you might write a letter of intent to show that you’re serious about the purchase. For real estate, a letter of intent would include things like the price, payment options and closing date for accepting the offer.

Contractors may use a letter of intent to outline terms for services, payment and confidentiality before they start working. 

 

6) Non-disclosure agreements (NDA)

What is a non-disclosure agreement?

Also known as a confidentiality agreement, a non-disclosure agreement (NDA) is a legally binding contract that enforces secrecy over confidential information. An NDA can be a one-way or mutual arrangement.

When would I use a non-disclosure agreement?

There are many situations in business that require sharing private and confidential information. For example, when discussing a potential deal with another business or an investor, you might need to disclose information like commercial plans or trade secrets. To avoid a breach in confidentiality, you could draft an NDA to ensure the other party only uses the confidential information to help them decide whether they want to enter the deal.

 

7) Partnership agreement

What is a partnership agreement?

A partnership agreement is a contract for two or more people or entities who want to form a business partnership. It outlines the nature of the business as well as the expected contributions and responsibilities of each person or entity.

What is a limited partnership agreement?

A limited partnership is made up of general and limited partners. A general partner manages and is involved in the running of the business. A limited partner contributes money to the business but doesn’t participate and has limited liability. 

Why would I enter into a partnership agreement?

Many small businesses, particularly family-owned companies, have existing long-term partners without a formal partnership agreement. This leaves businesses in a vulnerable position because those involved don’t have designated roles with clear expectations. As a result, small disagreements over how the business is run can easily lead to costly legal disputes.

 

8) Promissory notes (note payable)

What is a promissory note?

A promissory note is an enforceable written promise to pay back money owed. The document usually contains things like the total amount due, the interest rate and the expected payment date. It’s sometimes called a note payable.

When would I use a promissory note?

You’ll use promissory notes if you borrow or lend money. This type of document is common in the financial services industry and you’ll probably sign a promissory note if you take out a loan. Equally, if you lend money to someone, you might create a promissory note to formalise repayment.

 

9) Purchase order (PO)

What is a purchase order?

It’s a document sent to a supplier requesting to buy a product or service. It confirms what is to be bought or sold, the contact details of the buyer and seller, as well as the price and payment details. If the supplier accepts the request, it’s considered a legally binding agreement.

When would I use a purchase order?

POs can be used to help streamline the purchasing process. And because they specify costs and quantities, they help businesses to keep accurate records which is good for accounting purposes.

 

10) Service agreement

What is a service agreement?

A service agreement is a written or verbal contract that sets out the terms between a customer and a service provider. Most service agreements cover things like payment terms and timelines of work. It’s similar to a bill of sale or purchase order but defines a service rather than goods. 

Why would I use a service agreement?

If your business provides a service, you need to have a service contract in place to set out your terms and conditions. For example, a freelance graphic designer will use a service agreement to confirm quality expectations, deadlines and payment arrangements. 

 

11) Website terms of use

What are website terms of use?

A website’s terms of use (terms and conditions) should confirm how visitors are allowed to use the website and include information about the website’s content. Although not technically a contract in the strictest sense, your website terms of use are effectively an agreement between you and your website’s users. It can include things like an acceptable use policy, copyright information, disclaimers and the website’s privacy policy. 

Does my website need terms and conditions?

If you have a website, it’s a good idea to have proper terms and conditions. They can help to prevent things like unauthorised access to your site and unwanted plagiarism of your website’s content. They can also protect you against legal disputes because terms and conditions set out the rights and obligations of both the website owner and the website user.

 

If you’re unsure about the details of a contract you’re dealing with, it’s always a good idea to seek independent legal advice before signing the dotted line.